Researchers at Deutsche Bank have published a new presentation exploring the possibility that the European Central Bank will launch a program of quantitative easing (QE) later this year in a bid to provide further monetary stimulus to the beleaguered euro zone economy.
They expect ECB President Mario Draghi to signal “private QE” — purchases of securitized loans to small and medium enterprises — at the conclusion of the ECB Governing Council’s June meeting, and launch the program at the conclusion of the September meeting.
“The ECB could also engage in full scale ‘public QE’ (i.e., purchases of sovereign debt as in the U.S.),” write the researchers in the presentation.
“However, this would be far less effective in Europe than in the U.S. while the political hurdles remain high. We would only expect ‘public QE’ to materialise if the inflation and growth outlook worsen considerably.”
The slide below highlights the differences between a likely ECB QE program for Europe and the one that the Federal Reserve has been running in the U.S. since the financial crisis, illustrating why the former would probably not work as well.
Among the problems of doing QE in Europe: The impact from the “wealth effect” would be less significant, due to lower market participation, there would be greater public opposition to the purchases, and the form of QE wouldn’t hit the credit channel at the sweet spot.
The next slide shows Deutsche Bank’s prediction for how it will play out in Europe.
“In September, we expect that the ECB will commit to ‘private QE’, targeted at SME credit,” the researchers write.
“These purchases could focus solely on securitised assets. However, because of the limited scale of this market and regulatory constraints to its future development, the ECB may also target corporate loans held directly by banks. Irrespective of the choice of asset, it is crucial that the ECB signals it will remain in the market for some time, in order to incentivise banks to underwrite new loans thus underpinning credit origination and growth.”
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